Capital Allocators – Inside the Institutional Investment Industry

Jim Williams is the Vice President, Chief Investment Officer, and Treasurer of the Getty Trust, where he oversees a $7 billion portfolio for the Getty Museum. Before joining the Getty in 2002, Jim spent three years as the President of Harbor Capital Advisors and prior to that, was manager of the Ford Motor Company pension department. Our rich conversation covers all aspects of managing a significant pool of non-profit assets including modeling liquidity, creating a specialist team structure, sourcing managers, discerning between talented managers, co-investing, sizing manager positions, investing in venture capital, viewing hedge funds like a basketball point guard, working with a constructive board, and finding opportunities in the current "least dirty shirt" market. This conversation ranks way up there in the breadth, depth, and quality of discussion. I hope you enjoy listening as much as I enjoyed speaking to Jim. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes 2:40 – A look at Jim's background and how he got to the Getty Museum 8:23 – A look at the pool of capital at Getty 9:47 – How does the high dependence of the endowment on the institution impact asset allocation 12:17 - How do they think about liquidity 14:29 – What happens when they find a priceless work of art to acquire 17:52 – What beliefs did Jim bring to the table in shaping how Getty allocated capital 22:46 – How does Jim think about asset allocation vs manager selection 24:17 – Their approach to China 24:55 – Finding good managers in China 27:29 – What are underlying factors when choosing between two similar managers 30:34 – What are some ways Jim determines if people have the "stuff" to manage capital 34:23 – Deep dive into the co-investment program 36:07 – How do they underwrite co-investments in a short period of time 37:53 – Why do they pass on co-investment opportunities 40:58 – How does Jim size investments 42:24 – Number of manager relationships across the portfolio 44:14 – Thinking about the level of diversification their strategy creates 48:35 – Jim's take on public equities and hedge funds 51:15 – Exploring the working relationship with the board and trustees 53:19 – Why do endowment and foundation trustees seem to have more success than other groups of trustees 54:24 – How does Jim exercise his decision-making authority 56:06 – Example of when Jim pushed back on an idea from a senior member of the team 1:00:47 – How have they found and retained team members 1:03:35 – Other competitive advantages that Jim brings to the table 1:05:20 – What is Jim most excited about and most worried about in the markets/his portfolio 1:09:28 – Closing questions

Michael Cembalest is the Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management, a global industry leader with $2 trillion of client assets under management. Michael is also a member of the Investment Committee for J.P. Morgan Asset & Wealth Management and the Investment Committee for the J.P. Morgan Retirement Plan that covers the firm's 250,000 employees. Before taking on his current seat in 2012, he spent eight years as Chief Investment Officer of J.P. Morgan's powerhouse Global Private Bank. Prior to his work on the buy side, Michael worked on the sell side at J.P. Morgan Securities as head strategist for Emerging Markets Fixed Income. He started his thirty-year tenure at the firm as a member of the Corporate Finance division. Our wide-ranging conversation begins with Michael's early career that included watching a financial crisis unfold in the late '80s and side-stepping another in the late '90s, and turns to his role as CIO of a large, global private bank. We discuss differences in asset allocation and implementation between private clients and institutions and along the way come across his evaluation of Bernie Madoff, the creation of his strategy piece - Eye on the Market, the chart that everyone hates, the impact of politics, government debt, and energy on the markets, and views about active management. Lastly, you won't want to miss an amazing story Michael tells in answer to a new closing question. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes 3:14 – Michael's start at J.P. Morgan 4:12 - The creation of the first Brady Bond 6:14 – How did starting his career during a crisis impact his views on the world 8:10 – Early career roles 10:07 – Transition to the buy side 16:30 – Differences in managing money for a public company from managing money as an independent asset manager 17:25 – Transition to CIO 18:30 – First steps in changing the private bank investment structure from a closed model 22:21 – Overseeing a diverse group of clients 29:15 – How does he stay informed about everything impacting the markets 27:54 – Assessing Bernie Madoff 28:19 – Hedge funds and the tax difference they provide 30:28 – Differences in how Michael views various asset classes between taxable and tax-exempt pools 31:40 – Shift to strategy work and writing 34:09 – How does Michael describe Eye on the Market 35:20 – Domestic politics and geopolitical impact on the markets 38:52 - Looking at the high corporate profit landscape against the enormous debts of governments, nationally and locally 42:31 - Any way out of the debt problems we are seeing at state and local government level 47:31 – Entitlement spending in other countries 48:33 – Research on energy and consumption 51:44 – Use of technology to distribute his research 53:43 – Thoughts on active management 56:30 – Closing questions

One common refrain across my conversations has been the importance and subtleties of effective governance in making optimal investment decisions. Alongside Steven Galbraith's incredible career as an analyst, strategist, portfolio manager, and entrepreneur in the asset management business, he has served on as many Boards as anyone I know. I imagine many of you have heard Steve's story, but if not, you may want to have a listen to the very first episode of Capital Allocators before diving in here. Our conversation today starts with an update on Steve's personal investment in the Narragansett Beer Company and moves into a practical discussion inside the Board rooms of each of his current seats that range across a university, a large family office, a public company, a government agency, and two early stage fintech companies. We touch on time allocation, governance structure, Board composition, adding value, the politics of Boards, and the motivation of Board members. We also get an update on Steve's family office, that he's managing alongside his wife Lucy, a seasoned distressed debt investor, and we close with our brief, contrary outlook on the baseball season. Steve's perspective and insights on the real world of Boards is second to none, and this conversation is as full of gems as our first one. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes 2:45 – Update on Narragansett Brewery 2:53 – How Passion Investors Helped Revive Narragansett Beer 4:28 – Narragansett in the White House 5:19 – With all of the boards that he serves on, how does he manage his time 7:34 – How much time do these boards assume Steven is investing in them 9:32 – Highest functioning board 11:46 – Maintaining stability between the board and investment team 16:29 – What Warren Buffet had to say about the Tufts endowment 17:45 – What are the board dynamics in a family office 22:22 – Overview of for-profit boards 26:12 – Is the familial relationships of board members another way an investment committee could construct a board 26:56– Could a university or foundation create a board like this with close familial ties amongst members 28:46 – Optimal board structure of a foundation 29:57 – Steve's time in government serving on a board 32:52 – Board of startups and early stage companies 35:02 – A look at Steve's family office 37:20 – What do the analytics of financial companies look like 5-10 years from now 38:35 – Looking at the quality of analytics he currently gets from his outsourced team compared to larger firms he has worked with 39:37 – What is Steve seeing in the markets 40:42 – What is the most interesting idea that's come across Steve's plate in the past year 44:32 – Politics of boards and what drives them 48:36 – Closing Questions

Chris Brockmeyer is the Director of Employee Bennefit Funds for the Broadway League, the national trade association for the Broadway theatre industry. Chris serves as an employer-appointed trustee, in most cases as Co-Chair, on eleven multi-employer pension funds, seven health funds and four annuity/401(k) funds with approximately $7 billion in assets. For 11 years, Chris has artfully navigated delicate relationships across unions and employers and was honored for his great work by Institutional Investor magazine with the 2014 award for Taft-Hartley Plan of the Year. Before arriving at the Broadway League in 2007, Chris worked on both sides of the table – first representing employees in eight years of work for performer's unions and then seven years representing employers as Director of Labor Relations at Live Nation/Clear Channel Entertainment. Our conversation dives into the tricky governance dynamics of Taft-Hartley boards, including their challenging regulatory structure, keeping the peace among constituents, setting investment objectives, strengths and weaknesses of a slow-moving decision-making body, best and worst in relationships with investment consultants, and OCIOs as a governance solution. Those struggling with governance challenges will take a step back and admire Chris' dexterity in working productively with an ostensibly untenable set of circumstances. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes 2:08 – Chris's background and how that led him to a job on Broadway. 4:59 – Key skills that make Chris effective at his job 5:44 – Current role at the Broadway League 7:10 – What makes an effective board and a less effective board 10:25 - How do Chris and these various boards set out the investment objectives. 12:41 – What needs to change in Taft-Hartley plans 16:48 – The regulation of the Taft-Hartley Plan Boards 20:25 – Strengths and weaknesses of the consulting relationships 24:20 – How do discussions about increasing benefits translate into investment risk 27:17 – How wide is the range of asset allocation across all of the plans 29:05 – How do you explain expected rate of return assumptions in the current environment 31:15 – What are the strengths that Chris has seen in successful investment consultants 32:40 – Chris's core investing beliefs and how much he can influence these boards with them 35:31 – Are there places where the governance of Taft-Hartley plans could be improved 39:31 – Switching to OCIOs 41:32 – Would they ever go back to a regular consultant from an OCIO 42:59 – Other areas that have similar governance struggles 45:06 – What happens when Chris comes up with an investment idea 46:30 – Any concern that Chris's team is working with only average OCIO's or consultants as they look to scale up and attract larger funds 48:59 – Closing Questions

Andy Redleaf is the Founding Partner of Whitebox Advisors, a $5.5 billion multi-strategy hedge fund launched in 1999 with primary offices in the metropolitan hubs of Minneapolis, Austin, and Sydney, Australia. Before founding Whitebox, Andy spent twenty years trading options, for two years at Gruntal & Comes mpany alongside Stevie Cohen, fourteen on the CBOE, and five as a Founding Partner at Deephaven Capital Management. He has an irrepressibly creative mind and, alongside his partners, writes one of my favorite manager letters. Our conversation covers Andy's nuanced view of the evolution of trading markets and financial instruments over his forty-year career, including arbitrage trading in the 1970s and 80s, unintended consequences of the deregulation of trading commissions, segmentation of market participants, importance of liability management, growth of orphaned securities, and the pending shift from decentralized to centralized market systems over the coming years. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes 1:52 – Andy's background and the founding of Whitebox 5:34 – The math of options in the late 70's, early 80s 13:44 - The decentralization of markets 16:34 - Andy's transition into trading other strategies 18:31 – The launch of Whitebox 20:08 – The meaning of the firm name Whitebox 23:38 – An example of a transitioning security from one group of investors to another 28:31 – Has it gotten harder to find arbitrage opportunities 32:29 – The driver of the financial crisis 32:44 – Gary Gorton, Misunderstanding Financial Crises: Why Don't We See Them Coming 34:28 – His purchase of a bank 38:17 – How he got involved in the structured credit markets 42:39 – What is that Whitebox does differently from others 47:14 – Principles that guide the investment activities he likes to take part in 50:03 – How will the financial system evolve over the next 10 years 55:29 – Closing questions

Last fall, I sat down with a fellow former hedge fund of funds professional Khe Hy, who left the business a few years ago and has developed a fascinating media platform around introspection, self-awareness, and self-development. Certainly a set of characteristics we don't normally associate with folks in the asset management business. Khe interviewed me about my career path and some lessons I've learned about people, business, and life. With his permission, I am sharing the conversation to allow you to learn more about the perspective that I bring to the conversations on Capital Allocators. If you like the subject matter, I'd encourage you to check out Khe's podcast, entitled Rad Awakenings, available on iTunes or his website, radreads.co. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes 1:53 – Ted's time with Dave Swensen 2:40 – How did Ted get the job not knowing about stocks 3:56 – The start of Ted's time at Protégé 5:27 – How did Ted view the world as someone picking managers vs someone picking stocks 9:01 – Early days at Protégé 10:36 – Attributes that Ted tried to unpack about individuals 13:18 – Understanding a team's intrinsic vs extrinsic motivations 15:03 – How much of investing is about true skill vs being on the right side of a market trend 17:06 – What did Ted learn about greed during the bull market run of the early 2000's 20:00 – The ego, envy and entitlement of financial professionals 22:36 – The potential to hit a high-water mark and never feeling satisfied 28:20 – Loving what you do despite the financial windfall 32:50 – Would Ted have the same passion for the markets if he hit the proverbial lottery 34:36 – The feeling of financial survival and what would happen if Ted didn't have it 37:24 – Citizen Schools 38:41 – How to stop caring about other people's perception of you 40:46 – Most underrated attribute of Ted that he has discovered in his reinvention 41:53 – Times Ted's resilience was tested 43:08 – Ted on Invest Like the Best Podcast 43:10 – Hero's Journey Foundation 45:02 – What does higher education and first jobs look like for the next generation given the digital changes in society 49:20 – Do millennials have less upward mobility then past generations 49:43 – The Premium Mediocre Life of Maya Millennial 52:09 – Follow and learn more about Ted at capitalallocatorspodcast.com 57:41 – Closing questions with special guest interviewers

Wayne Wicker is the Senior VP and CIO of ICMA Retirement Corporation, an asset manager that oversees $50B across more than a million retirement accounts of City and County public sector employees throughout the country. Before joining ICMA-RC in 2004, Wayne had a distinguished career as an allocator and manager, starting as an allocator at the corporate pension fund of Dayton Hudson (now Target Corporation) in the 1980s and the Howard Hughes Medical Institute endowment in the mid-1990s, after which he moved to direct investing in large cap growth equities for seven years at Cadence Capital Management in 1998. Our conversation covers Wayne's career path, multi-asset investing, and the ins and outs of managing defined contribution plans as a fiduciary and as a business. We discuss asset allocation strategies, regulatory limitations, stable value products, retirement shortfall risks, active vs. passive on large pools of capital, and managing internal and external teams. This episode took place at a recent Institutional Investor conference for Corporate Funds and Insurance Portfolios, with the core discussion about ICMA-RC occurring in front of a live audience. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes 2:01 – How Wayne first got into the investment business 3:58 – What he did after getting his MBA 7:25 – How he learned about the pension business as a staff of one 9:18 – Key investment lessons from his early career 11:08 – Decision to move on from Target/Dayton Hudson 12:44 – Key differences between overseeing a corporate pension vs a hospital endowment structure 14:25 – How much did the difference in the investing strategy come from the mission of the funds vs the boards overseeing them 15:50 – What could Wayne do on the margin at Howard Hughes 17:28 – Transition to CIO 22:40 – Live Show Begins 23:00 – Defining ICMA-RC 23:32 – How does Wayne think about setting investment objectives with such a diverse group of clients 25:02 – Is it frustrating to have a more finite universe of investing options compared to previous work at Howard Hughes and Dayton Hudson 26:08 – Views on active vs passive 27:50 – The manager selection process 28:49 – Managing risks with external managers vs an internal team 30:34 – How does the team at ICMA-RC put their best ideas forward without governance getting in the way 31:34 – What constraints are imposed on investment decisions by the various regulatory bodies that ICMA-RC faces 32:40 – Their outlook on the market 34:08 – How does ICMA-RC's constituents respond to market performance 35:32 – Closer examination using 2008 stock performance 36:23 – How does Wayne educate investors 38:00 – Next steps for ICMA-RC 38:51 – Most challenging aspect of Wayne's work life 39:41 – Is there a looming pension crisis 40:53 – How do the Financial Planners help the employees if things don't work out 42:10 – How do they think about financial planning for clients when there's a chance defined benefit plans could come up short in the future 45:06 – How does Wayne address manager selection differently today given some of the constraints that he faces 47:19 – What has led Wayne to want to exit manager relationships 49:46 – Is there a point where Wayne would decide the optimal strategy is to go passive 51:28 – How does Wayne think about technology and the way it will be disrupt the industry 52:58 – Balancing the internal/external dynamic when hiring people 54:30 – Wayne's greatest success and failure over the last 14 years 55:50 – Where will the move into emerging markets come from 56:27 – What does Wayne think of the new products that can help younger constituents meet their retirement objectives 57:41 – Live Show Ends/Closing questions

Our exploration of the use of modern data analytics to enhance investment results continues this week with two of the leading providers of tools for portfolio managers. My guests on today's show are Clare Flynn Levy and Cameron Hight, both former investment managers who became entrepreneurs seeking to improve outcomes for other managers. Clare is the founder and CEO of Essentia Analytics, a behavioral data analytics service that enables fund managers to capture rich data about their own behavior and its context. Essentia analyzes trading history to help managers overcome common behavioral biases and optimize their trade entry and exit on positions. Cameron is the Founder and CEO of Alpha Theory, a fintech company that helps investment managers optimize their position sizing process. By creating a disciplined, real-time process based on a decision algorithm with roots in actuarial science, physics, and poker, Alpha Theory takes the guessing out of position sizing and allows managers to focus on what they do best - picking stocks. Our conversations cover the founding of their respective businesses, the mistakes portfolio managers commonly make, the tools they employ to help managers improve, and the challenges they face in broader adoption of these modern tools. The good news is the clients of Essentia and Alpha Theory have demonstrated improvement in their results after employing these techniques. If you ask Clare and Cameron, you may come a whole new appreciation about the potential for active management going forward. You can learn more about these two innovative companies at essentia-analytics.com and alphatheory.com. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes Clare (2:26) 2:29 – Clare's path to founding Essentia 5:42 – What makes data science of investing revolutionary in the past five years 6:25 – The pitch for Essentia's tools 7:57 – How do you use data to get into the behaviors that work and the ones that don't 8:06 – Michael Mauboussin podcast episode 8:10 – Annie Duke podcast episode 11:03 – Specific tenants of behavioral finance 12:39 – Parts of the portfolio process that they explore 14:20 – How do you actually convince people to change behavior 16:17 – The nudges built into the system 21:26 – How much data is needed to be able to help improve performance 22:16 – Most interesting data set that a portfolio manager has tried to get to improve their performance 24:21 – Is there consistency in people's patterns 27:08 - The hardest part of convincing someone to become a client 29:16 – What other places does Essentia plan on expanding 30:42 – Given all of the data that Clare has seen, what's her outlook on active management 32:39 - Closing questions for Clare Cameron (37:58) 38:02 – Cameron's background and the founding of Alpha Theory 38:35 – What problems does Alpha Theory looks to solve 38:49 – Psychology of Intelligence Analysis (Richard Shure) 40:13 – The mistakes he sees portfolio managers make 42:29 – What tool does Alpha theory is provide to portfolio managers 44:17 – What changes in the portfolio manager's implementation 47:27 – What have been the outcomes when people implement Alpha Theory 51:58 - Are there different firms or type of firms that are better at picking stocks 56:36 - The Concentration Manifesto 1:00:25 – How they calculate batting average of allocators 1:01:41 – Where else could this tool be applied 1:03:31 – What questions should allocators be asking of managers 1:05:09 – How much does the input of information impact the outcome 1:06:42 – What other research has Cameron been able to do based on this data 1:08:56 – Biggest challenge in running this business 1:11:23 – Closing questions for Cameron

Increased sophistication in manager assessment is an important trend in the search for alpha. My conversations with Michael Mauboussin and Annie Duke suggested frameworks to think about enhanced decision-making processes and prompted a deeper dive into the ways allocators and managers can improve their craft. This week and next explores some of the tools available to help make it happen. Basil Qunibi is the CEO of Novus Partners, a data analytics company whose mission is to help the world's top investors generate higher returns. As big data pervades commerce across industries, Novus is the most well-known provider of tools to analyze investment manager performance, allowing allocators to play Moneyball by breaking down the attributes of manager skill. Novus' 200 clients are split between allocators and hedge fund managers who collectively oversee approximately $3.5 trillion of assets. You can learn more about the company and its service at novus.com Our conversation starts with Basil's path to creating Novus and dives into the tools an allocator can use to improve their understanding of a manager's skill, including the data sets available to allocators, the levers a manager employs in driving returns, the relationship between data and a manager's process, a framework to analyze crowded names, and future horizons for data-driven assessments of managers. DONATE TO CYCLE FOR SURVIVAL, http://mskcc.convio.net/goto/ted. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes DONATE TO CYCLE FOR SURVIVAL, http://mskcc.convio.net/goto/ted. 2:46 – The founding of Novus 5:45 – What did the qualitative assessment of managers look like at first for Basil 6:50 – How did he start to quantify managers 09:47 – What he saw in the initial data 13:24 – The early days of Novus, going all the way back to the concept 14:05 – Direct from Dell: Strategies that Revolutionized an Industry 14:07 – Sam Walton: Made In America 16:27 – Novus' first product 19:13 – Core components of measuring the skill of a manager 19:54 – Exposure management 22:10 – Capital allocation 23:27 – Idea selection 24:10 – Position sizing 25:11 – Tactical trading 25:45 – How should this data be used 28:08 – Why this data is useful for capital allocators 30:48 – How efficient is the market for talent 31:54 – What has happened to stocks that are crowded compared to those that aren't 35:15 – How does Novus use conviction in their metrics 36:43 – Consensus and concentration 40:02 – How Novus went from servicing allocators to also helping managers themselves 42:22 – Overview of Novus' clients and what they've been able to learn from all of this data 46:45 – What other markets could Novus be applicable to 48:56 – Most creative application of this data by a client 49:53 – Closing questions

Rick Selvala is the co-founder and CEO of Harvest Volatility, a ten-year old manager of a variety of volatility strategies that oversees $13 billion in assets. After starting his career in the Treasury department at General Motors in the mid 1980s, Rick has spent nearly three decades trading derivatives on the sell side and buy side. Rick has an uncanny ability to break down this complicated investment area and make it sound simple. Our conversation discusses the world of volatility, including intelligent uses of derivatives, overcoming headline risk, characteristics of successful traders, assessment of alpha, the current volatility environment, and strategies that capture returns. His insights left me thinking twice about some of the assumptions my System 1 brain had formed about volatility. Time for System 2 to go to work. DONATE TO CYCLE FOR SURVIVAL, http://mskcc.convio.net/goto/ted. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes DONATE TO CYCLE FOR SURVIVAL, http://mskcc.convio.net/goto/ted. 3:03 – Rick's path to Harvest 5:17 – How should one think about volatility as an asset class 7:56 – Volatility as a path to enhance yield 11:07 – Is there a programmatic way to implement 12:55 – Volatility as a path for insurance 15:45 – Where do people go wrong with leverage 18:28 – What level of understanding of this space do clients really have 21:58 – How would someone express the idea that volatility is cheap in the market 22:04 – Bill Spitz podcast episode 24:24 – What strategies could managers take advantage of in a low volatility environment 26:01 – How does Rick asses if someone is a good trader 27:32 – How do you identify firms that are too bold 29:26 – Does the community have a good sense of whether traders are acting responsibly 30:08 – How do you determine if a manager is outperforming 32:11 – Is there a structural return from selling insurance to the market 34:13 – Have computer systems changed trading in the derivatives market 35:14 – Taking a look at the current environment 38:43 – Recent market turmoil 39:58 – Are quants impacting market volatility 41:26 – What's next on the frontier for Harvest 45:02 – Closing questions